Mt. Cisco

“Amazon may be a `river of no returns’. But Cisco is solid as a rock. The dot.coms were crazy and everyone knows it. But that doesn’t mean you can’t make money in the stock market. Especially at these low prices. And with Greenspan cutting rates. I mean, the money has to go somewhere.”

The speaker was no one in particular. But he probably expressed the views of millions of people.

They have discovered that following the heels of a greed- obsessed mob leads nowhere they want to go. So, they’ve become `value’ investors – looking for the real bargains amid the damaged goods and day-old bread of the post-bubble market.

There are some values on Wall Street. I have mentioned a few `pretty darned cheap’ stocks to you over the last few days. Lynn Carpenter hunts for them every day…and finds a few.

But this approach requires something most investors lack – an ability to understand what a value investment is. In value investing, to quote Warren Buffett, value matters. Cisco was considered a great value back at the end of 1999. “Without Cisco,” said one analyst, “there would be no Internet.” Fortune put a photo of Cisco’s CEO on its cover with this rhetorical question: “Is John Chambers the best CEO on earth?”

In Cisco, you had a company with a lock on the Internet, and by extension, the entire Internet Age, with fat profit margins and run by a man who was arguably the best corporate manager who ever lived. How could you possible want more `value’ than that?

Investors loved it. They bid the stock up 89,000% to the point where Cisco was the most valuable company in the world, worth $550 billion.

But last year, Cisco earned only $2.7 billion. At that rate shareholders buying at the peak would have had to wait 237 years to earn their money back. And that supposes that the world of technology…as well as the rest of the world…remained unchanged for more than two centuries.

One of the marvels of human consciousness is the ability to hold two contradictory ideas at once – believing in them equally. Thus it was that investors were able to imagine a world of constant technological upheaval on the one hand…and one in which a line of routers and switches remained as firmly and securely planted as the Cathedral of Notre Dame on the Ile de la Cite. Revolutions may come and go, but Cisco will still ring out the profits…they must have thought.

Cisco, the company that promised growth rates of 30% to 50% per year as far ahead as the eye could see, turned out to be incredibly nearsighted. As recently as last October, Cisco said it would grow 30% this year. But 2 weeks ago, the company admitted that sales had fallen, not risen, by 30%…and profits were down 75%. Cisco was forced to write off $2.2 billion worth of parts, products and supplies – which it now says it has no hope of selling. And CEO Chambers, says he has very little “visibility” into the future.

What is astonishing about this story is how little pedagogic value it has had. The mountain has rumbled…ash has fallen…many investors have already been swept away in the lava flows. And yet, land prices on Mt. Cisco are rising. Cisco stock has gone up more than 40% in the last 6 weeks.

Every myth about Cisco has been discredited. Its CEO may be a visionary, but he cannot see around corners. He may be able, but he is no match for the credit cycle. “Real time” inventory monitoring systems did not prevent Cisco from over-stocking its shelves. Information technology did not prevent an economic slowdown. Productivity did not rise to a whole new magnitude. The demand for the Internet connections has not proven to be infinite. Economic life in the 21st century has turned out to be much like economic life in the last one.

Values still matter.

Your correspondent…always searching for the essentials…the real values…

Bill Bonner
Paris, France
May 25, 2001

P.S. Greenspan may cut the fed funds overnight loan rate. At 4% it is already only 7 tenths of one percent above the Consumer Price Index. Thus, the real interest rate to member banks is less than 1%. Two more 50 bps cuts and bankers will be borrowing money at a negative interest rate. The Fed will be paying them to take it.

But that alone does not make Cisco a good investment. The real economy…and the real value of the companies listed on Wall Street…are not so easily manipulated. Cisco is surely a better value at $22 than it was at $60 or more. But earnings per share have gone negative… it has a long way to go before it is a value investment.

Again, Eric Fry has watched the market for us today. Eric, editor of, will also be the guest host on CNN-FN next week, 9:30 – 11 E.S.T. My notes and letterfollow, as usual.

From Eric:

*** Stocks bounced a bit yesterday, with the Dow up 17 and the Nasdaq rising 38 points.

*** Vermont Sen. James Jeffords – the Independent trapped in a Republican Senator’s body – decided to shed his Republican ectoderm and be his own man, whatever that is. Now that this political side-show is all settled, the stock market can get back to doing what it does, whatever that is.

*** “This period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated,” Greenspan warned yesterday. More interest rate cuts may be on the way, he hinted. The Chairman’s message seemed surprisingly gloomy, given the sunny mood on Wall Street lately.

*** Greenspan feels he can’t plop down onto the porch swing and sip iced-tea just yet. Two economic reports released yesterday – the weekly jobless claims report and the monthly new home sales – both reflect an economy that is struggling.

*** Jobless claims for the week ending May 19 total 407,000 – 15,000 more than the week before. The latest Manpower Inc. employment survey reveals the US companies are in no hurry to hire additional workers. In fact, “Companies have become as cautious about hiring employees as they were in 1990 and 1991, when the US had its last major recession,” the Wall Street Journal reports.

*** People without jobs make lousy homebuyers. Almost 10% fewer homes sold in April than in March. It has been four years since new home sales dropped so quickly in one month. A fluke? Unlikely, given the fact that both mortgage rates and unemployment rates are rising.

*** America’s unemployed are not buying cars either. “Moody’s analysts are not enthusiastic about the near-term prospects for motor vehicle sales,” the rating agency writes. “This is a sector that could take a sudden turn for the worse to the potential disadvantage of the overall economy. Despite an improved pace compared to 2001’s first four months, the production of motor vehicles in the US was off by nearly 10% from a year earlier during May’s first fortnight.”

*** Even as the US unemployment rate climbs, jobs are becoming more abundant in the Old World. Last week’s report from Britain showed unemployment falling to a new low of 3.2%. Job vacancy numbers are near all-time highs. Which leads one to wonder, “How do they accomplish such feats without Alan Greenspan? And without America’s `dynamic labor market’…or its `information age’ economy?”

*** The celebrated Manhattan steak house, Smith & Wollensky, may be a favorite of carnivorous New Yorkers, but its stock is no better than gristle on Wall Street. The restaurant company’s shares, which listed on the NYSE Wednesday at $8.50 each, finished their first day of trading at $7.77.

And a few notes from Bill:

*** “It was fun while it lasted,” said a middle-aged woman in Santa Fe. I was trying to find out how people really felt about stocks. Are they ready to jump back in with everything they have? Are they already fully invested? Or, once burned, are they twice shy?

*** “I was doubling my money every month for a while there,” she continued. “I would watch CNBC…and when I heard about a stock that sounded interesting, I called my broker. It was easy. I had a great time. Of course, I lost most of the money when the Nasdaq fell. Now I’m sticking with the real companies – like Cisco and GE…”

*** “All of my friends are in about the same position,” said a 48-year-old friend in Baltimore. “They all lost …I’d say, about 20% to 40% of their money last year. Now they want to make it back as quickly as possible.”

*** You don’t hear those sentiments at a major bottom. When stocks hit their lowest points, people don’t want to talk about them at all; they have no interest in buying them and no hope of getting even.

*** Sy Harding elaborates: “I may be wrong, but the recent degree of willingness to jump back in, particularly into the same hot stocks that caused the problems in the first place, has been a confirming sign to me that, while I called for a significant rally, odds remain high that it’s only a bear-market rally that will end as the market’s unfavorable seasonal period takes over.” More below…

*** What’s an investor to do? “Most mutual funds are well- near incompetent at picking stocks as a monkey throwing darts,” writes my friend Lynn Carpenter. “John Bogle, creator of another Vanguard titan-the S&P 500 Index fund- calculated – by looking at all the funds available in 1969 and tracking them for the next 30 years – that you might as well throw darts-over your shoulder. Blindfolded.”

*** Author Tom Wolfe was in Baltimore last week. Recently, Wolfe made the news by describing the three giants of American contemporary literature – Norman Mailer, John Irving and John Updike – as “the three stooges.” Speaking at Johns Hopkins University, Wolfe explained that contemporary literature is “narcissistically introspective and self-obsessed.” He also described what he called a “blight of progress:”

“One reason that Jefferson, or for that matter Zola or Balzac or any of these great figures of the 18th and 19th centuries got so much done, so much more done than people today, is that they didn’t have any time-saving or labor- saving devices…If Jefferson were alive today….he’d never finish answering the email.”

*** I arrived back in Paris a few minutes ago. It is warm, beautiful and swarming with tourists. The tables at the Paradis Caf? have spilled out into the street – and they are all full. If you’re coming to Paris this summer, be sure to make your hotel reservations as soon as possible.